Option Care Health, Inc. (OPCH) Q2 2023 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Option Care Health Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Shapiro, Chief Financial Officer. Please go ahead.

Good morning. Please note that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to future financial performance and industry and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today's press release as well as in our Form 10-K filed with the SEC regarding the specific risks and uncertainties. We do not undertake any duty to update any forward-looking statements, except as required by law. During the call, we will use non-GAAP financial measures when talking about the company's performance and financial condition. You can find additional information on these non-GAAP measures in this morning's press release posted on the Investor Relations portion of our website. And with that, I'll turn the call over to John Rademacher, Chief Executive Officer.

Thanks, Mike, and good morning everyone. The second quarter was a very dynamic period for the Option Care Health team, and we will discuss many of these items in our prepared remarks. First and foremost, I cannot be more grateful for our team or more proud of the execution and dedication that was demonstrated across the organization. Their focus continues to enable us to provide unparalleled patient care and customer service, which translates into strong key performance, metric achievement and financial results in the quarter. As always, Mike will review the results in greater detail, but I'll cover some of the highlights. The growth profile of the business continues to be strong as we delivered solid results across the board. Revenue growth of 9% was comprised of balanced growth across the acute and chronic portfolio, and due largely to our strong execution and unique procurement benefits in the quarter that Mike will discuss, adjusted EBITDA was $110 million and adjusted EBITDA margin exceeded 10%. Building on the strength of our second quarter performance, we are tightening and raising our adjusted EBITDA target for the full year to $415 million to $425 million. Over the quarter, we continue to be active on the business development front as well, announcing a new collaboration with Krystal Biotech and preparing for potential emerging therapies to treat neurological disorders such as Alzheimer's. Our collaboration with Krystal Biotech enables us to help provide a new and innovative gene therapy treatment for patients who suffer from dystrophic epidermolysis bullosa. We believe our ability to leverage our advanced capabilities and comprehensive pharmacy infrastructure to support this innovative gene therapy demonstrates the responsiveness and broad clinical capabilities we possess across our network, and that these attributes are valuable to our pharma partners. Although, this product is for a rare disease that impacts roughly 3,000 patients across the United States, the collaboration continues to validate the investments we have made into our platform and the clinical capabilities necessary to support complex products and care plans. We also continue to focus on the emergence of new infused treatments for Alzheimer's. With the recent FDA approval of Leqembi, we remain closely connected to patients, pharma providers and payers to help ensure we are part of the solution to a potential revolutionary category of new therapies. While we remain cautious on the near-term impact these therapies may have on our business due to the expected patient adoption pace and reimbursement challenges. I believe we are uniquely positioned to help ensure access to care for Alzheimer's patients and their families across the country. We continue to work closely with key stakeholders to determine coverage, seek fair reimbursement, and to advocate on behalf of patients to allow us to provide high quality care at an appropriate cost in a safe and convenient setting in which they want to receive their care. Turning to M&A, as you know, in early May, we announced our intention to merge with Amedisys, which we believed was the unique opportunity to create an innovative post-acute platform that would help us transform the way care would be delivered in the home. As articulated over the course of the second quarter and reinforced by the continued positive results we are reporting today, the merger was pursued from a position of strength as we believe our base infusion business has had a solid foundation and continues to perform quite well. Since announcing our proposed merger with Amedisys, Mike and I have spent a significant amount of time engaging with many of our shareholders and others in the financial community. We appreciate the opportunity to hear your feedback and perspectives and look forward to continuing this conversation with you in the coming weeks. In that vein, we made the discipline decision to terminate our agreement to merge with Amedisys and accept the $106 million break fee. Today, we are announcing that given the strength of our performance in cash position, we intend to deploy an additional $100 million through share repurchases over the near-term. Given the strength of our balance sheet and forward outlook, we believe it is appropriate to return essentially all of the break fee to our shareholders through our existing share repurchase program, which our board approved earlier this year. Our capital allocation strategy has been and will continue to be focused on generating favorable returns for our shareholders on a sustainable basis. While we have consistently identified pursuing opportunistic M&A as a top capital allocation priority, over the near-term, we expect that this will be limited to smaller tuck-in type transactions designed to deepen our existing strategic position and deliver additional value to our stakeholders through the provision of patient-centric care. Where circumstances allow, we will also look for ways to return capital to our shareholders through continued share repurchases or other means. Before I turn the call over to Mike, I will finish where I started. I believe the Option Care Health team is uniquely positioned in the post-acute space to deliver extraordinary care and change lives for the better, while also generating strong financial results. We understand the privileged position we possess in serving patients in their homes or in one of our infusion suites and the trusted advisor role that our clinicians play in supporting the care plan. We’ll continue to work in a disciplined way to identify opportunities that deepen our expertise or broaden our capabilities to capture more share and play a more significant role in care delivery in the home or alternate site setting. As evidenced in our revised guidance, we are expecting 2023 to be another solid year with double digit earnings growth and attractive cash flow generation, and we’ll continue to focus our efforts to position Option Care Health to serve more patients and provide significant value to all of our key stakeholders. And with that, Mike will provide additional color on the results. Mike?

Thanks, John. Overall, the second quarter carried the momentum from the first quarter and the business continues to perform quite well. Revenue growth of 9% reflects continued strong commercial execution, partially offset by the headwinds we articulated heading into the year, namely the divestiture of certain respiratory therapy assets, the decline of two key therapies Radicava and Makena, as well as some ASP declines in certain therapies. Nonetheless, utilization continues to be strong and reflects our efforts to be a partner of choice for our referral sources. I would highlight that as we enter the back half of the year, the impact of exited therapies and higher acute baselines due to competitive closures last year will be more pronounced than in the first half. Gross margin of 23.5% reflects our continued focus on operational excellence as well as some distinct procurement benefits in the quarter. On the execution front, we continue to drive efficiencies, including utilization of our ever expanding infusion suite footprint. In the quarter, we opened an additional four new centers and we exited the quarter with suite utilization above 29% of all of our nursing visits. As we’ve discussed on many occasions, our procurement efforts are quite dynamic and affected by variability in pricing indices. In the second quarter, we realized approximately $8 million to $10 million from favorable procurement dynamics that emerged due to the timing variances in reference prices that affect our cost relative to reimbursement. This generated approximately 80 basis points to 100 basis points of gross margin benefit. We expect this dynamic to continue into the second half of the year and is reflected in our guidance. However, we do not anticipate that this will be sustainable in the medium-term. Excluding the procurement benefit, gross margins continue to expand modestly, despite the mixed headwinds we’ve talked about. Adjusted EBITDA of $110 million represented 10.3% of revenue and grew 29% over the prior year’s second quarter. Again, these results reflected the estimated $8 million to $10 million procurement benefit. Excluding the benefit, the business continues to perform quite well and still generated mid-teens earnings growth. Cash flow generation continues to be quite robust and our relentless focus on cash conversion continues to result in solid cash flow from operations. Our leverage profile continues to improve and we are quite encouraged by our recent upgrade by Moody’s to Ba3, which we believe is affirmation of the progress we’ve made around our capital structure. In our results, you’ll note that we recognized a non-operating net gain reflecting the receipt of the $106 million break fee offset by accrued deal related expenses. All aspects of the merger activities, including the break fee and expenses and related tax impact have been adjusted out of our adjusted EBITDA results as reconciled in this morning’s 8-K. GAAP earnings per share is naturally inclusive of the merger-related activities. We received the break fee prior to the end of the quarter, which is also reflected in cash flow from operations. As John articulated, we anticipate deploying $100 million through our share repurchase program in the near future subject to market conditions and applicable legal requirements. As a reminder, earlier this year our Board of Directors authorized a share repurchase program of up to $250 million. We have repurchased $75 million of stock year to date, and therefore have sufficient authorized capacity remaining under the Board authorization. As John referenced earlier, we see a multifaceted capital deployment strategy focused on strategic M&A and share repurchases as the current optimal strategy to maximize shareholder value. Given the momentum in the base business, we expect that our near-term focus will be on driving organic growth and potentially on pursuing smaller adjacent or tuck-in acquisitions. Based on the strength of the second quarter, we are revising our guidance accordingly. We now expect to generate revenue of $4.2 billion to $4.3 billion. We expect to deliver adjusted EBITDA of $415 million to $425 million inclusive of the near-term procurement benefits I mentioned earlier that are expected to continue into the back half of the year. While we do not provide quarterly guidance, we do expect the remaining quarters to be relatively flat to Q2 with respect to net revenue and adjusted EBITDA, given a number of dynamics including tougher prior year comps, as well as the impact of the two declining therapies and divested respiratory therapy assets I referenced earlier. Additionally, our revised cash flow guidance of at least $350 million includes the second quarter inflow from the merger break fee. So overall, we expect to deliver another very solid year of growth. And with that, we’re happy to take your questions. Operator?

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Lisa Gill of JPMorgan. Please proceed with your question.

Thanks very much. Good morning and congratulations on a great quarter. Just want to understand just a couple of the comments that you made. First off, when I think about the revenue growth in the quarter, I think either Mike or John, you talked about it being more evenly split. But was there anything that that you would call out on either the chronic or acute side? And I’m just curious, as more MCOs are shifting towards the outpatient setting for surgical procedures, et cetera, are you seeing that also translate into higher acuity on your side would be my first question. And then secondly, I know you’re cautious around Alzheimer’s, but this is a big opportunity. Is there any way you can frame the potential of what could go through Option Care eventually? I’m thinking of this as probably more of a 2024 opportunity than a back half of 2023 opportunity. And I’ll stop there.

Yes. Lisa, it is Mike. I’ll start with some of the mechanics around revenue. Look, we’re thrilled with the 9% top line in the quarter as consistent with what we shared on the first quarter that was comprised of mid-single-digit acute, low-double-digit chronic. And again, that’s after a little more than 2 full points of headwind given the fact that last year we had the respiratory therapy revenue, we did see a meaningful decline throughout the quarter in the two exited therapies, and we did start to see some tougher comps emerged later in the second quarter last year with some of the competitive closures. So, the 9% is – and again, we just like to go with the results that we post, but there were conservatively 200 basis points of top line headwind from those therapies and the comps from the prior year.

And Lisa, on your – the second part of your question, both on procedures and what we’re seeing from the acuity standpoint, again, productive quarter, we talk a lot about the reach and frequency of our team. We think we’re well positioned especially as there seems to be a little bit more of an uptick of utilization in the inpatient setting. And the byproduct of that is we – with the embedded resources that we have in our care transition specialists, working closely with those discharge planners and case managers at the hospitals, finding the opportunities to identify patients that safely and effectively can be transitioned on to care with Option Care Health. So feel as if well positioned there and we’ll continue to monitor the situation closely. But feel really good about what the team was able to do especially in the acute space and deepening the partnerships and the relationships that we have there. On the Alzheimer’s front to kind of put a little more color around that. Again, really excited for the revolutionary aspect of some of these therapies and the positive impact that it can have on patients and the families that are suffering from cognitive impairment. At this point in time, the CMS has come out with a high level of view of how they’re looking at coverage determination, but many of the payers have not yet woven it into their medical policy and have not come out with clear guidance around how to bring patients onto service. We’ve called out before that the diagnostic aspect of this is going to be a pretty heavy lift both in positron emission tomography scans that are required as well as MRIs. And so, we want to be cautious and thoughtful around the way that we’re approaching it in the current Medicare fee for service model. As you know, there isn’t a robust home infusion therapy reimbursement path, and so we expect that MA plans will benefit from our infrastructure. We built out a significant amount of our infrastructure with our infusion suites in order to support these types of emerging products. And therefore, as we get better clarity around the path to payment, we get better understanding around what is the prior authorization requirements and how that would fit within a normal flow. We think we are well positioned as being part of the solution of offering high quality care at an appropriate cost in a setting in which patients want to receive it. So that’s kind of where we are at this point in time and we think it will develop as it moves forward. And there’s some better clarity around that coverage determination, medical policy and then reimbursement path.

And just to be clear that that’s probably a 2024 opportunity, right?

Yes, 2024, 2025. It will start to build – it’s hard to anticipate right now the pace of uptake of the patients, given some of the hurdles that will exist with the diagnostic imaging and other components.

Okay. Great. Thanks for all the comments.

Yes. Thanks, Lisa.

Thanks, Lisa.

Thank you. Standby for our next question. Our next question comes from the line of Brian Tanquilut of Jefferies. Please proceed with your question.

Good morning guys. Congrats on the quarter. I guess, my question for you guys, as I think about the durability of this strength in organic growth, obviously, Mike you’ve talked about some of the moving parts in the gross margin line. But how should we be thinking about your ability to sustain this level of performance going forward?

Yes. Look, Brian, I think the quarter was very illustrative of how we’ve tried to articulate the growth proposition of this platform. The high single digit top line translated into leveraged earnings growth at a pace greater than top line. And as we’ve tried to articulate and call out when there’s some idiosyncrasies that we benefit from or that represent headwinds that’s why we wanted to call out that, look, while we’re thrilled with the quarter and we’re thrilled to eclipse 10% EBITDA margins, that is with some benefit on the procurement line. That is a bit transitory. But putting that aside, I think despite some of the top line headwinds, this platform is still performing in line with how we’ve articulated and given some of the macro trends around where care is headed, given the fact that when patients are given the option, this is the care setting in which they would prefer at a cost that is attractive to payers, we think that’s a message and a platform that has durability to borrow your terminology and will resonate for some time.

That’s awesome, Mike. Maybe my follow-up as I think about the proxy that was filed related to the Amedisys deal, right? I mean, there was a number or there’s an EBITDA number there for next year for 2024. I mean, is it – without thinking about guidance, but is it right to think that as given the strength this year and the moving parts, that that number should push it up a little bit as well?

I’m going to respond to what you would expect, Brian, which is, at this point, we’re in no way shape or form in a position to provide guidance into 2024 nor should the proxy be interpreted as longer-term guidance. I think, again, underscores the growth platform that we’ve articulated. Obviously there’s a lot of moving pieces in terms of some of the competitive closures and positions as well as our procurement position that we will gain better insight into in the back half of this year. And we will update accordingly. But again, as part of my prepared comments, I did want to highlight that some of the procurement benefits are more transitory in nature.

Yes, I appreciate that. Just thought a try. Thank you.

You bet.

Thank you. Our next question comes from the line of Matt Larew, William Blair. Your line is now open.

Good morning, Mike and John. So Mike, you called out obviously the procurement benefits on the gross margin line, but some of the things affecting EBITDA margins are utilization of the ambulatory suites and your efforts on the staffing side, both the acquisitions and then through Naven. So can you gave us a quick flash on utilization of the suites in the quarter? But as you’re thinking about both the back half the year, and then maybe as you’re not contemplating the future here, how do you feel about how those two pieces are contributing, and what more can you do with now the Naven platform under your arm elm?

Matt, it’s John, I’ll start with Naven and Mike can put a little more color around, how we’re looking at in the overall performance aspect. First and foremost, really thrilled with the progress we’re making with Naven Health. As we have talked before, bringing those two organizations together under that common umbrella and the investments that we’re making into the technology infrastructure and really the operating model we feel is making a significant progress and at or above our expectations as the team has really pulled that together. We truly believe that this is part of the capacity management as we’re looking at our growth trajectory and we’re looking at the ways that we can tap into scarce clinical resources or have access to scarce clinical resources. This gives us an advantage in order to do that. As Mike said in the prepared – in his prepared remarks, really thrilled about 29% of our nursing visits were done in our infusion suites. As we’ve talked about, that has been a focus for us, again, reminding folks that that’s a – we offer that choice to our patients. So it’s one in which we believe that convenience and access is a big part of that story and part of the build out not only positions us well for some of the future therapies, but also gives choice to our patients in where they want to receive their care. And so, the team has done a great job in launching those new sites in filling the chairs on that we’re over 600 infusion chairs today. And so we continue to believe that that is a big part of our ability to not only manage expenses and drive some operating leverage, but also provide better choice to our patients.

And the only thing I’d add, Matt, is again, just to underscore what John said, we don’t force patients into the centers. We make their – we educate them on their care options, and we provide them with a very pleasing setting where they have a very favorable experience. And when we really embarked on our AIS initiative, we were in the 16%, 17% penetration range. So we’ve added over 10 points of penetration on our nursing visit, which is important because obviously that helps us on the operating leverage line. It also gives us the confidence to take on additional patients by better utilizing our clinical capacity. And it also sets us up well for future growth vectors in response to Lisa’s question around being ready for new disruptive therapies in the pipeline.

Okay. And then just following-up on Alzheimer’s, obviously this opportunity has always had the caveat of CMS reimbursement. CMS recently changed their coverage around PET scans for beta-amyloid imaging. And that was perhaps another gating factor. So curious, given the changes that would be needed for home infusion you viewed it as a sign that CMS is more open to changes. Have you had conversations that have perhaps been more progressive than they have in the past about potential changes?

Matt, we continue to have constructive conversations both as an industry. So as part of the National Home Infusion Association, as well as independently with folks in Washington trying to find a better path and better access for home infusion for Medicare beneficiaries. And yes, I do think that there is going to need to be a solution for the size of the patient population that potentially could be treated by some of these Alzheimer’s products. And I think it is going to require some different thinking at the national level around how to provide access safe and effectively at an appropriate cost for Medicare beneficiaries. So I’m always cautiously optimistic. Mike is always cautiously pessimistic on that. And so we’ll continue that balance. But we truly believe that we are on the right side of this conversation in that high quality care at an appropriate cost in a setting in which patients want to receive it, seems to be in alignment with what Medicare beneficiaries want and what ultimately federal taxpayers would want. And so we’re going to continue to have the conversations and continue to advocate strongly on the benefits of home infusion as well as our AIS infrastructure as being part of the long-term solution.

Okay. Thanks.

Thanks, Matt.

Thanks, Matt.

One moment for our next question. Our next question comes from the line of David MacDonald of Truist. Please proceed with your question.

Good morning, guys. Just a couple left. Guys, can you talk a little bit about utilization in a different way in terms of the ambulatory infusion suites? I know you talked about the 29%. But if you look at running these things from, let’s say, nine to five, five days a week, where are you relative to that? Are we still talking about maybe 20% to 25% or less utilization in terms of kind of the full range of hours that you could run these? Just trying to get a sense of how quickly these things could scale up and how much capacity you have?

Yes, that’s the exciting thing Dave is, from a capacity perspective, we have tremendous additional capacity, our disposal. When we open these, they’re not opened five days a week, 12 hours a day, we typically ramp up. And when they’re not being used, we turn out the lights and we lock the door. We’ve talked about in the team models, the uptick in utilization and we have a very tight band of yield given the proven successes we’ve had. They breakeven at about a year to 15 months where the clinical labor savings offset the rent utilities and the cost of the facility. And typically within two years, we’re generating about a 10% clinical labor productivity, which again, helps the bottom line, but it also think of it as that adds 10% more capacity through Naven in our nursing core. And so, as we think about the road ahead, virtually none of our sites today are operating five to seven days a week, 8 to 10 hours a day. And so, – and to generate the type of yield and productivity they don’t have to. So as we think about whether it’s demand shocks, whether it’s additional volume of existing therapies or its new therapies, we feel really good about the capacity and the chair volume that we can absorb within the existing centers as well as the ones that we have planned in the back half of this year and going into next year.

And then, guys are you continuing to see dramatically higher uptake amongst new chronic patients as opposed to kind of installed patients? So as that continues to grow, this 29% should or could continue to drift higher?

Yes, Dave, it’s John. We see a higher yield from that perspective on new patients that are being presented to us through that process. We do get some conversion of existing just because of convenience. And as we’ve started to build out a more comprehensive network that looking at the gravity maps of where our patient census lives and works, we’re getting some transitions into the infusion suite. But I characterize it as you did in that the vast amount of where we see the utilization is on those new patients as we’re bringing them on board and presenting them with those opportunities. And that’s where we expect that as we continue to grow, we’ll continue to see that move northward above the 29%. And our goal is to utilize it as efficiently and as effectively as possible.

Dave, we’re also seeing some expansion of scope of therapies that are applicable in the center. For example, there may have been injectables or short duration therapies that required healthcare professional oversight that in a normal home economic model wouldn't make sense. Take something like a Cabenuva, which is a regular injection for drug-resistant HIV, it requires healthcare professional oversight, but it's a relatively short duration therapy, one that wouldn't justify sending a nurse to on a two-hour round trip. Those economics are much more attractive if you have the infrastructure and the clinical labor in a setting. And so we've been able to expand our therapy capacity at the same time.

Okay. And then just last question, I know you guys have talked about kind of year-over-year inflation and comps and stuff like that. Are there any – one or two areas that you'd call out as still kind of stubbornly painful on the cost side?

Look, I guess as John properly labeled me as cautiously pessimistic. We are always operating under the premise that the cost challenges are part of our structural playing field. And that clinical labor is going to continue to be a challenge. We need to recruit our clinical teams and our broader teams every single day. And that the overall cost of operating the facilities, maintaining clean rooms, working with our suppliers to make sure we have adequate supplies. Our working presumption is that this is the new world order and that the higher inflationary cost is an arena that we use as a rally cry for the team to continuously look for operating efficiencies.

Okay. Thanks very much guys. Appreciate it.

Yes, thanks Dave.

One moment for our next question. Our next question comes from the line of Pito Chickering of Deutsche Bank. Please proceed with your question.

Yes. Good morning guys. Two quick questions here. As we look at capital allocation, you're quite clear that you're going to return the breakup fee to shareholders in a repurchase, doing small tuck-in acquisitions. I think you used the word near-term in the script. I just want to explore that. And if the medium term or long term you look to do another transformational deal?

Hey Pito, it’s John. So, from our perspective, our responsibility is to always look for sustainable growth for our shareholders and all our key stakeholders. And we know that the healthcare ecosystem is going to continue to evolve. We know that care in the home is going to continue to be a center of focus. We know that we've got to continue to identify opportunities to increase our relevance and expand our capability sets through that process. And as we – as I called out in my prepared comment, in the near-term we will be focusing a little bit closer to the core around that. But we're always going to take a look to understand what capabilities are going to be required to build that sustainable durable long-term growth for the business and best position Option Care Health to continue to be a leader in home and alternate site infusion services. So we'll continue to take a look at that. And as we have done before, use a very disciplined approach in which we stack up the opportunities that sit before us and make certain that we are hearing the voice of our customer and the voice of our patients and the voice of all of our key stakeholders as we're determining that best path forward. So that's kind of what the comments were. And I believe that's our responsibility is to look for those opportunities to build that durable, sustainable, long-term growth trajectory for Option Care Health and our shareholders.

Okay, great. And then Mike, a numbers question for you. If you think about the headwinds and tailwinds for 2024 from what you've provided so far today, the tailwinds would be the 200 basis points of top line growth pressure this year from tougher comps and declining therapies. At the same time, I guess, how does that impact margins next year? And then on headwinds, how do we think about the procurement growth pricing going from tailwind 2023? Is that a headwind for next year and how does that impact margins? And then finally, on the acute side, if acute business sort of normalizes out next year, or how does that impact both the top line and bottom line? So I guess, when you put all these things together, how do you think us for 2024, what's your typical year? Is it in line both revenues and margins? Is one higher, one lower? Just a lot of moving parts here. Just want to make sure I understand how to think about the launch pad in 2024, what you provided today?

Yes, Pito, as you can imagine, I'm going to preface my comments. It's way too early, and we're just simply not in a position to be providing any granular thoughts on 2024 at this point. Obviously, we're just getting started with our budgeting processes for next year. I think the fundamental takeaway or message that I would say is back to my comments I made a few minutes ago around our underlying conviction around the way we've socialized the growth profile of this business remains intact. We've said that we see the acute growing in the low to mid single-digits, and the chronic growing in the – at the other end of the barbell in the low double-digits, given us confidence that this is a high single-digit top line enterprise. I don't think that changes next year. And again, if there are idiosyncrasies that affect it, we'll call that out as we've done this year. And look as it relates to how we translate that into leverage growth, there's a lot of moving pieces we need to quantify not exclusively, but including our procurement dynamics as we head into that year. And you know, better than I do that with ASPs and AWPs and procurement dynamics there, it's constantly shifting. And so unfortunately not in a position to provide you a lot of guidance, what I would just underscore is, as John and I said in our prepared remarks, our conviction in the underlying growth profile of this business, which is founded on our ability to be that referral partner of choice for health systems and payers remains very much intact. And we think that that fundamental profile persists.

Great. Thanks so much.

Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of Jamie Perse of Goldman Sachs. Please proceed with your question.

Hey, thanks. Good morning. I just wanted to spend a minute on just in inflationary pressures and gross margins. With the inflation pressures having anniversaried, I guess really the question is just how to think about COGS growth going forward in the back half of the year, and then on the procurement benefits, it sounds like those are transitory but not isolated to 2Q. So just any color on how much that continues in the third quarter. And I've got one follow up.

Yes, Jamie, maybe I'll start. Look on the inflationary pressures. Look, it's a constant battle as we think about the cost environment. I mean, obviously as we highlighted last year, like every other enterprise, we were facing once in a generation inflationary impacts across the board. We think that we've put a fence around those and we've remained subject to what I would characterize as ordinary course inflationary pressures. And there's additional emerging areas, whether it's health benefits continued wages in certain pockets with certain disciplines that, again, we're going to continue to be battling. So the one connotation I don't want to leave the audience with is that, costs are completely flat or isolated. It's just the new arena in which we're operating, how that translates into COGS growth. I mean, the operations team has done a spectacular job of uncovering every rock to make sure that we're providing unsurpassed patient care in a more efficient setting and managing all aspects of the supply chain. And we'd expect that to continue. Again, on the procurement benefit, again, our estimate, and again, it shifts with payer dynamics and with utilization in certain settings. But the 8 million to 10 million that we estimate we saw in the in the second quarter, we'd expect to continue at least for the next quarter. Again, we characterize it as continuing into the back half. As you know, this isn't a light switch where one day we have it and one day we don't. But to the best of our modeling abilities, we would expect a relatively similar benefit, at least in Q3.

Okay. Thanks for that. And then on SG&A, it's historically been a big source of operating leverage for you guys, it's up about 9%, and in the first half of the year, not far below where revenue is growing. Are you making specific investments right now, at a time, when gross margin – you've got some of these offsets on gross margin. Are they related to some of the preparing for Leqembi type of comments or just any investments you're making at this point? And if those are leverageable in the back half and into 2024?

Yes, it's a great question. I appreciate you asking it, Jamie, because you're absolutely right. One of the things we pride ourselves on is the discipline around expense management and delivering leveraged growth. But the reality is, at the same time, it's our responsibility to be making investments for sustainable durable growth going out. A perfect example is our infusion suites. Our SG&A, is where we report all of our facilities expenses. So as we've expanded meaningfully our suite presence in the first half of the year, all of that rent, utilities, insurance for those new centers, when we flip the light switch on that all hits SG&A. We're investing in other capabilities internally to make sure that we're supporting, as John mentioned, the business development investments to commercialize new therapies like VYJUVEK and make sure that we're manning the gun, so to speak, with Alzheimer's on the horizon. So there's absolutely a number of investments we're making that will either pay off later this year or frankly, in 2024 and 2025, and that's where we need to manage for the near-term as well as the medium term.

Okay. Just to clarify on that real quick. I mean, just you talked about all the capacity you have in the infusion suites a few minutes ago. So is it right to think that you don't have to kind of continue growing SG&A at this pace in the back half and in 2024 as you grow into that capacity? Or are you still actively opening new centers and chairs and that'll drive the SG&A?

Yes, Jamie, it's John. We'll continue to make investments into the network and the footprint when we talk about the capacity, certainly that is within the market. And we'll look for utilizing that with growth as we're driving that forward. And certainly as we bring on more and more patients within those communities. But we also take a look and understand at the local market level what that network of infusion suites needs to be to capture the patients as we're looking at it being conveniently located and along the lines of where the gravity maps show patient density either where they live or where they work. So we're going to continue to make investments into the infrastructure. There are market, metros markets that will require some additional suites in order for us to truly capitalize on the network and optimize the network design through that process. At some point in time, I'd say, in 2024, 2025, it may start to slow, but we expect that we're going to have an investment that's going to be required at least over the near to medium term on that.

Okay. That's helpful. Thank you.

Thanks Jamie.

One moment for our next question. Our next question comes from the line of Michael Petusky of Barrington Research. Please proceed with your question.

Hey guys. Thanks for taking the question and really appreciate the commentary, prepared comments and the Q&A. So I want to follow up on a couple things related to sort of capital allocation and external growth opportunities. So just real quickly preface, there was a rumor out there, a year or so ago about you guys potentially pursuing a health risk assessment business, stock acted poorly in the – I guess under the shadow of that the Amedisys deal was less than universally loved. And I guess, my question is understanding that these are potentially pursuing assets that'll help in a future of healthcare and value-based care and all the rest. I think everybody gets that, but I think concerns essentially around the size of the deals and the risk associated with deals of that size. And as you've talked to shareholders, I guess I'm wondering future deals where maybe you're looking to position the company for the future of healthcare. I mean, would you more consider partnerships that weren't straight M&A or smaller deals, essentially wading into the pool as opposed to jumping into the deep end as you look at assets? Thanks.

Michael, it’s John, I'll try to answer that question. So I guess first and foremost, our focus as an organization is making certain that we are well positioned to deliver extraordinary care to the patients that we serve. And we're always going to look for opportunities to invest to either deepen our capabilities within a market, or to broaden the capabilities that we can offer while we're in the home. And we believe we're in a privileged position in order to do that. And the trusted advisor role that we play with patients and their prescribers as we're executing around the care plan and that is the focus of the leadership team, and certainly for Mike and I as we're thinking about strategically how we want to move that forward. As I said in my prepared remarks, our focus over the near-term is certainly going to be around probably closer to the core of looking at tuck-in and additive aspects of that. And we're going to continue to evaluate what opportunities is as we look at how the healthcare ecosystem evolves. We have very productive relationships with the managed care organizations and health plans and we listen to their voice around where they have needs and how they want to manage their patient populations. And we want to be part of that solution as we move ahead. So, we're going to continue to look at those opportunities. We'll be disciplined in our approach. We will certainly have conversations with all of our key stakeholders. And I would tell you that as we went through the process, and certainly as we announced the Amedisys deal, we got a wide range of feedback from our shareholder base around understanding how that fit into the long-term strategy and how that creates a different model and durable as the healthcare ecosystem is evolving. And I think as an organization, we've demonstrated that we can take on big transactions. We're coming up almost to the fourth year anniversary of the BioScrip merger. And as an organization, we have executed extremely well on that. And we're going to continue to focus around our ability to drive meaningful growth and sustainable growth for our shareholders, through the appropriate capital allocation strategy. And so I feel really good. I mean, we're disappointed that the Amedisys transaction went in a different direction, but also hopefully folks understand the discipline that we apply in the way that we look at acquisitions and the additive nature that that can bring to the business but also in a very disciplined and focused way.

Okay. Very good. Congrats on the great quarter. Thanks.

Yes, thank you.

Thanks, Mike.

At this time, I would like to turn the call back over to management for closing remarks.

Yes, thank you. Thank you very much for joining us on this call this morning. As you heard, we had a very solid quarter and first half of the year and expect to carry this momentum in the third quarter and back half. We look forward to providing you with further updates as we execute our strategies and deliver extraordinary care to more and more patients and their families. Thank you everyone, and I hope you have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.